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^al3ittjjs  Jfttsurame 


BY  LOUIS  D.  BRANDEIS 


^. 


g)abings  Insurance 


BY 

LOUIS   D.   BRANDEIS 


Copyright.    1906,  by    Collier's    Weekly 

Republished  by  special  permission  under  the  auspices 
of    the    Massachusetts     Savings     Insurance    League 


BOSTON 

Geo.  H.  Ellis  Co.,  Printers,  272  Congress  Street 

1907 


i.pr  or 


P«oF.  WwrHBv 


Xi/e  insurance  among  the  poor,  who  can  pay  only  five  or  ten  cents  a  week,  is  a  very 
different  matter  from  insurance  for  those  who  buy  thousand-dollar  policies  and  pay 
once  a  year.  The  wage-earner  must  pay  twice  as  large  a  premium :  only  one  out  of 
eight  wage-earners  ever  gets  anything  back  for  what  he  paid  in,  and  this  fortunate 
one  gets  back  much  less  in  proportion  for  his  pittance  than  does  the  ordinary  policy- 
holder. The  present  article  describes  all  this,  explains  the  reasons  for  it,  and  outlines 
a  remedy.  The  author  is  a  Boston  lawyer  who  combines  a  large  corporation  practice 
with  active  devotion  to  public  interests.  He  is  one  of  the  leaders  of  the  Public  Fran- 
chise League,  which  succeeded  in  bringing  about  a  solution  satisfactory  to  the  public 
of  the  complicated  gas  situation  in  Boston,  and  has  kept  a  firm  control  over  other 
public-service  corporations. 


SAVINGS   INSURANCE 


THE  average  expectancy  of  life  in  the  United  States  of  a 
man  21  years  old  is,  according  to  Meech's  Table  of 
Mortality,  40.25  years.  In  other  words,  take  any  large 
number  of  men  who  are  21  years  old,  and  the  average  age  which 
they  will  reach  is  61 J  years.* 

If  a  man,  beginning  with  his  21st  birthday,  pays  throughout 
life  50  cents  a  week  into  Massachusetts  savings  banks,  and  allows 
these  deposits  to  accumulate  for  his  family,  the  survivors  wiU,         ^. 
in  case  of  his  death  at  this  average  age  of  61 J  years,  inherit  $2,265,901  ^  r^A 
if  an  interest  rate  of  3  J  %  a  year  is  maintained.!  ^^A. 

If  this  same  man  should,  beginning  at  age  21,  pay  throughout 
his  life  the  50  cents  a  week  to  the  Prudential  X  Insurance  Company 
as  premiums  on  a  so-called  "industrial"  life  pohcy  for  the  benefit 
of  his  family,  the  survivors  would  be  legally  entitled  to  receive, 
upon  his  death  at  the  age  of  61 J  years^only  $820. § 

If  this  same  man,  having  made  his  weekly  dep'osit  in  a  savings 
bank  for  20  years,  should  then  conclude  to  discontinue  his  weekly 
payments  ^nd  withdraw  the  money  for  his  own  benefit,  he  would 
receive  $746.20.  If,  on  the  other  hand,  having  made  for  20  years 
such  weekly  payments  to  the  Prudential  Insurance  Company,  he 
should  then  conclude  to  discontinue  payments  and  surrender  his 
policy,  he  would  be  legally  entitled  to  receive  only  $165. 

*  According  to  the  American  Experience  Table  of  Mortality,  the  expectancy  is  41.53 
years;  according  to  Dr.  Farr's  General  English  Experience  Table  No.  3,  it  is  38.80  years. 

t  The  average  interest  rate  paid  by  the  Massachusetts  savings  banks  during  the  ten 
years  ending  October  31,  1905,  was  3.83%.  The  lowest  average  rate  of  all  these  banks 
in  any  one  year  (1903)  was  3.709%. 

%  The  result  in  other  industrial  life  insurance  companies  would  be  substantially  the 
same. 

§  The  payment  to  be  made  by  the  insurance  company  would  be  increased  by  small 
amounts  from  time  to  time  paid  by  way  of  benefits  or  dividends  if  any  are  declared. 


268476 


So  widely  different  is  the  probable  result  to  the  workingman 
if  he  selects  the  one  or  the  other  of  the  two  classes  of  savings  in- 
vestment which  are  open  to  him;  and  yet  life  insurance  is  but 
a  method  of  saving.  The  savings  banks  manage  the  aggregate 
funds  made  up  of  many  small  deposits  until  such  time  as  they 
shall  be  demanded  by  the  depositor;  the  insurance  company, 
ordinarily  until  the  depositor's  death.  The  savings  bank  pays 
back  to  the  depositor  his  deposit  with  interest  less  the  necessary 
expense  of  management.  The  insurance  company  in  theory  does 
the  same,  the  difference  being  merely  that  the  savings  bank  under- 
takes to  repay  to  each  individual  depositor  the  whole  of  his  deposit 
with  interest;  while  the  insurance  company  undertakes  to  pay 
to  each  member  of  a  class  the  average  amount  (regarding  the 
chances  of  Ufe  and  death),  so  that  thc^se  who  do  not  reach  the 
average  age  get  more  than  they  have  deposited  (including  interest), 
and  those  who  exceed  the  average  age  less  than  they  deposited 
(including  interest).  The  fundamental  object  of  both  savings 
and  life  insurance  institutions  is  the  safe  and  profitable  invest- 
ment and  care,  at  a  minimum  of  expense,  of  funds  contributed 
from  time  to  time  in  small  amounts.  To  attain  this  end,  the 
essential  qualities  on  the  part  of  the  management  of  both  classes 
of  institutions  are  good  judgment,  honesty,  economy,  and  ac- 
curacy. 

Why,  then,  does  the  workingmen's  investment  in  industrial 
insurance  prove  relatively  so  disastrous  ? 


WHAT  INDUSTRIAL  INSURANCE  IS. 

Industrial  insurance  is  simply  life  insurance  in  small  amounts 
of  the  kind  commonly  taken  by  the  wage-earner.  In  the  United 
States  the  policies  average  now  about  $140.  They  serve  mainly 
to  provide  funds  to  meet  the  wage-earner's  heavy  expenses  of  a 
last  illness  and  a  decent  burial.  They  are  considered  a  prime 
necessity  among  the  working  people,  so  that  of  the  20,936,565 
level  premium  Hfe  insurance  policies  outstanding  in  the  ninety 


American  companies  on  January  1,  1905,  15,678,310  were  indus- 
trial policies. 

The  peculiar  features  of  industrial  as  distinguished  from  or- 
dinary Hfe  insurance  are: — 

(a)  That  the  premiums  are  fixed  for  all  ages  at  5  cents  or  mul- 
tiples thereof,  the  variations  for  different  ages  being  in  the  amount 
of  insurance  so  purchased,  whereas  in  ordinary  life  insurance 
the  variation  is  in  the  amount  of  premium. 

(b)  That  the  premium  is  payable  weekly:  whereas  in  ordinary 
life  insurance  the  premium  is  payable  annually,  semi-annually, 
or  quarterly. 

(c)  That  the  premium  is  collected  from  house  to  house,  whereas 
in  ordinary  life  insurance  the  payments  of  premium  are  com- 
monly remitted  by  mail  or  are  made  at  the  office  of  the  company 
or  of  its  agents. 


INDUSTRIAL— Infantile  Table. 
Weekly  Premium,  Ten  Cents. 

BENEFIT   PAYABLE    IP   POLICY   HAS 
BEEN   IN   FORCE    FOR 

Age  next  birthday  when  policy  is  issued. 

2 

3 

4 

5 

6 

7 

8 

9 

Less  than  three  months 

$16 

20 

24 

30 

34 

40 

48 

58 

110 

160 

200 

240 

$18 

22 

28 

34 

40 

48 

58 

102 

160 

200 

240 

$20 

26 

32 

40 

48 

68 

94 

140 

200 

240 

$22 

28 

36 

48 

58 

86 

130 

190 

240 

$24 

32 

44 

58 

78 

120 

180 

240 

$28 

38 

52 

70 

110 

170 

240 

$32 

44 

70 

100 

160 

240 

$40 
56 
100 
150 
240 

More  than  3,  but  less  than  6  months  .... 
More  than  6,  but  less  than  9  months  .... 
More  than  9  months,  but  less  than  1  year 
One  year          

Three  " 

Four     "      

Five     "      

Six       "      

Seven  "      

Eight  "      

One-half  the   above   amoimts  will  be  paid  for  a  weekly  premium  of  five  cents.       No 
higher  premium  than  ten  cents  will  be  taken. 

Table  showing  the  rates  charged  for  baby  insurance  by 
the  Prudential  Insurance  Company.  For  five  cents  a 
week  this  company  will  insure  a  child  one  year  old, 
paying   the    parents   eight    dollars    in    case    of   death. 


THE  APPALLING  WASTE  IN  INDUSTRIAL 
INSURANCE. 

In  the  United  States  about  94%  of  all  industrial  insurance  is 
furnished  by  three  companies,  the  Metropolitan  of  New  York 
writing  49%,  the  Prudential  of  New  Jersey  36%,  and  the  John 
Hancock  of  Massachusetts  9%.  Each  company  issues  also  or- 
dinary life  policies. 

The  Metropolitan  (which  alone  separates  in  any  published 
statement  the  expense  of  its  industrial  department  from  its  ordi- 
nary hfe  department)  discloses  that  the  managing  expenses  of  its 
industrial  department  in  the  year  1904  (exclusive  of  real  estate 
taxes,  insurance  taxes,  and  departmental  fees)  was  42.08%  of  all 
premium  receipts.  The  expense  in  the  John  Hancock  is  stated 
to  be  "about"  40%.  That  of  the  Prudential  is  probably  higher 
than  either  of  the  other  companies. 

In  the  year  1904  the  average  expense  of  management 
of  these  three  companies  (including  both  the  ordinary  life 
and  the  industrial  departments)  was  37.21%  of  all  pre- 
MIUM RECEIPTS.     Premium  receipts  of  insurance  companies 

CORRESPOND  TO  DEPOSITS  OF  SAVINGS  BANKS.  In  THE  SAME  YEAR 
THE  PERCENTAGE  OF  MANAGEMENT  EXPENSES  TO  DEPOSITS  MADE 
DURING  THE  YEAR   OF  THE    188   MASSACHUSETTS   SAVINGS   BANKS 

WAS  1.47%.  In  other  words,  the  percentage  of  expense  of  man- 
agement to  premium  receipts  of  these  insurance  companies  was 
twenty-five  times  as  great  as  that  of  the  savings  banks  to  their 
year's  deposits.  Yet  the  percentage  of  expense  of  the  industrial 
department  of  these  insurance  companies  alone  is  even  greater  than 
37.21%  of  the  premium  receipts,  the  companies'  percentage 
of  expense  being  reduced  by  reason  of  the  fact  that  the  compa- 
nies issue  also  ordinary  life  policies.  Even  the  extravagantly 
managed  Mutual  Life,  New  York  Life,  and  Equitable  (which 
issue  only  ordinary  life  policies)  took  for  such  managing  ex- 
penses in  1904,  on  the  average,  only  23.33%  of  the  year's 
premium     receipts;      while    the    Metropolitan,    the    Prudential, 


9 

and  the  John  Hancock  (which  issued  both  kinds  of  poKcies) 
took  37.21  %. 

It  is  true  that  the  collections  of  premium  by  an  insurance  com- 
pany are  partly  for  the  purpose  of  carrying  insurance  risk,  as  well 
as  for  that  of  investment,  while  the  deposits  in  a  savings  bank  are 
accepted  solely  for  the  purpose  of  investment,  but  this  circum- 
stance does  not  by  any  means  wholly  destroy  the  significance  of 
the  foregoing  comparisons. 

How  heavy  the  burden  is  which  the  present  system  of  industrial 
life  insurance  imposes  upon  the  workingman  can,  however,  be 
fully  appreciated  only  if  we  bear  in  mind  the  following  facts : — 


First — ^The  Double  Premium. 

The  premium  payable  for  any  given  amount  of  industrial  in- 
surance is  about  double  that  payable  on  ordinary  hfe  non-par- 
ticipating poUcies. 

Thus,  in  the  MetropoHtan,  an  industrial  poUcy-holder  insuring 
at  age  21  would  pay  60  cents  a  week,  or  in  the  aggregate  $31.20 
a  year  for  a  $984  poUcy,  while  he  would  pay  only  $16.55  a  year 
for  an  ordinary  Hfe  non-participating  $1,000  policy.  In  the  Pru- 
dential a  man  of  40  would  pay  50  cents  a  week,  or  in  the  aggregate 
$26  a  year,  for  a  $500  poHcy,  while  he  would  pay  only  $27.03 
for  an  ordinary  life  non-participating  $1,000  policy. 


Second — ^The  Quadruple  Expense  of  Management. 

The  proportion  of  the  premium  taken  for  management  expenses 
in  the  case  of  industrial  insurance  is  about  twice  as  great  as  in  the 
case  of  ordinary  Hfe  non-participating  poHcies ;  and,  since  the  pre- 
mium also  is  about  twice  as  great  as  for  an  ordinary  non-partici- 
pating Hfe  poHcy  of  Hke  amount,  it  follows  that  the  industrial 
poHcy-holder  pays  toward  expense  of  management  four  times 
as  much  as  even  the  present  expense  charge  borne  by  the  ordi- 
nary Hfe  policy-holder  for  the  same  amount  of  insurance. 


10 


Third — ^The  High  Lapse  Rate. 

About  two-thirds  of  all  industrial  policies  lapse  and  are  forfeited 
within  three  years  of  the  date  of  issue,  the  premiums  paid  thereon 
proving  a  total  loss  to  the  policy-holder.     In  the  year  1904  87  % 

OF  THE   INDUSTRIAL   POLICIES   IN  THE   METROPOLITAN,   THE  PRU- 
DENTIAL, AND  THE  John  Hancock  which  terminated  within 

THE  YEAR  WERE  FORFEITED ;    AND  ONLY  13  %  RESULTED   IN     ANY 
PAYMENT  TO  THE  INSURED. 

Of  the  2,761,449  industrial  insurance  policies  in  these  three  great 
companies  which  terminated  by  death,  surrender,  and  lapse  during 
the  year  1904,  aggregating  in  amount  $422,633,987,  payment  was 
made  to  insured  on  only  347,072,  or  about  one-eighth  of  the  poli- 
cies. In  other  words,  the  holders  of  2,414,377  pohcies,  with  ag- 
gregate insurance  of  $379,708,958,  made  a  total  loss  of  all  pre- 
miums paid. 

The  fact  that  more  than  40%  of  each  premium  goes  to  ex- 
pense of  management,  when  taken  alone,  fails,  therefore,  to  show 
how  great  this  industrial  insurance  waste  is.  We  must  remember 
that  the  expense  is  more  than  40  %  of  a  premium  which  is  double 
the  ordinary  premium.  But  even  these  facts  considered  together 
do  not  fully  disclose  the  waste.  They  indicate  only  the  loss  to 
persisting  policy-holders.  We  must  remember  also  that  those 
whose  policies  lapse — a  great  majority  of  all  who  insure — lose 
also  (except  for  the  temporary  protection)  the  whole  100  %  of  their 
premiums. 

THE   CAUSES  OF  THIS  WASTE. 

What  are  the  causes  of  this  appaUing  waste  of  the  workingmen's 
savings  ? 

(A)  Not  Financial  Depravity. 

Financial  depravity  is  not  an  important  cause.  The  recent 
insurance  investigations  have,  it  is  true,  disclosed  in  the  Metro- 
politan and  in  the  Prudential,  as  in  the  Equitable,  the  New  York 


11 

Life,  and  the  Mutual  Life  of  New  York,  grave  breaches  of  trust. 
These  industrial  companies  also  have  paid  exorbitant  salaries. 
In  them  also  official  position  and  policy-holders'  money  have  been 
used  for  private  profit.  By  them,  also,  illegal  contributions  have 
been  made  to  secure  legislative  favors.  And,  in  addition,  the 
stockholders  of  the  Metropolitan  and  of  the  Prudential  have,  to 
a,  degree  unknown  in  ordinary  life  companies,  received  unjusti- 
fiable dividends.     The  capital  of  the  Prudential  has  been 

SWELLED  FROM  $91,000  TO  $2,000,000  OUT  OF  THE  PREMIUMS 
EXACTED  FROM  WORKINGMEN,  SO  THAT  NOW  THE  COMPANY, 
WHILE  PAYING  NOMINALLY  A  10  %  DIVIDEND,  IN  FACT  PAYS  TO  ITS 
STOCKHOLDERS  IN  DIVIDENDS  EACH  YEAR  AN  EQUIVALENT  OF 
£19.78  %  ON  THE  CASH  ACTUALLY  PAID  IN  ON  THE  CAPITAL  STOCK. 

The  capital  of  the  Metropolitan  likewise  has  been  swelled  out  of 
wage-earners'  premiums  from  $500,000  to  $2,000,000,  so  'that  now 
the  company,  while  paying  nominally  a  7  %  dividend,  in  fact  pays 
to  stockholders  each  year  an  equivalent  of  28%  on  the  cash  act- 
ually paid  in  on  the  capital  stock.  The  profitableness  of  the  busi- 
ness to  stockholders  and  officers  is  further  shown  by  the  fact  that 
the  Metropolitan,  in  oder  to  increase  its  own  business  and  to 
eliminate  competition,  bought  out,  in  1902,  a  small  Kentucky 
company  on  terms  which  netted  its  stockholders  nearly  $400  per 
share  for  stock  on  which  only  $100  had  been  paid  in. 

But  the  amount  diverted  from  policy-holders  by  financial  irregu- 
larities, though  large  in  the  aggregate,  is  small  as  compared  with 
the  total  of  premiums  paid.     Financial  depravity  does  not  explain 

why  IN  FIFTEEN  YEARS  THE  WORKINGMEN  OF  MASSACHUSETTS 
HAVE  PAID  $55,285,744  in  industrial  premiums  to  THESE 
THREE    COMPANIES,    AND    RECEIVED    BACK    IN   ALL    ONLY    $19,881,- 

353;  that  is,  35.96%  of  the  aggregate  premiums  paid,  without 
interest.*  The  John  Hancock  appears  to  have  been  managed 
throughout  with  scrupulous  honesty  as  a  mutual  company,  and  yet 
in  the  fifteen  years  ending  December  31,  1904,  it  took  from  Massa- 
€husetts  industrial  policy-holders  in  premiums  $18,319,730,  and 

*  The  figures  for  the  United  States  are  not  available,  the  payments  to  industrial  policy- 
holders not  being  separated  from  those  to  ordinary  policy-holders. 


12 

paid  to  them  only  $5,942,033,  or  32.43  %,  without  interest,  of  the 
premiums  paid.* 

(B)  Not  Mere  Extravagance. 

Nor  is  this  fearful  waste  of  workingmen's  savings  due  to  mere 
extravagance  in  management.  The  working  organization  of  these 
companies  is  said  to  be  admirable;  and,  aside  from  a  few  exor- 
bitant official  salaries  in  the  Metropohtan  and  the  Prudential,  the 
employees  of  the  three  companies  are  certainly  not  overpaid  on  the 
average.  The  Armstrong  Report  states  that,  of  the  12,000  or  13,000 
agents  in  the  Metropolitan,  "an  enterprising  man  who  devotes 
his  whole  time  to  the  business"  received  an  average  of  $11.64  per 
week;  the  2,112  clerks,  an  average  of  $15;  the  about  2,700  assist- 
ant superintendents,  $25  a  week;  and  the  about  350  superintendents 
$50 ;  and  that  the  fees  paid  for  each  medical  examination  and  in- 
spection were  50  cents  and  25  cents  respectively;  that  the  Pruden- 
tial paid  to  8,582  agents  on  the  average  $14.61  per  week;  to  1,751 
assistant  superintendents,  $24.24;  and  to  223  superintendents 
$95.55.  Obviously,  therefore,  mere  extravagance  is  not  the  cause 
of  this  waste  of  workingmen's  savings. 

(C)  The  System  Vicious. 

The  real  cause  of  these  meagre  results  to  the  insured  from  in- 
dustrial insurance  is  not  financial  depravity  or  extravagance,  but 
the  extraordinary  wastefulness  necessarily  attendant  upon  the 
present  system  of  supplying  life  insurance  for  workingmen. 

The  principal  elements  of  expense  in  industrial  insurance  are: 

(1)  The  initial  expense  on  issue  of  policies,  taken  in  connection 
with  the  large  percentage  of  policies  lapsed. 

(2)  The  expense  of  house-to-house  collection  of  weekly  pre- 
miums. 

*  The  insurance  reserve  and  some  surplus  were,  of  course,  accumulated  also. 


13 


(A)  THE  INITIAL  EXPENSE. 

The  average  initial  expense  as  figured  by  the  MetropoHtan  was^ 
in  1904,  $2.07  per  policy  on  which  the  average  premium  was- 
12  cents  weekly.  It  is  probably  about  the  same  in  other  companies ► 
In  the  John  Hancock  the  initial  expense  includes  the  agent's  com- 
mission at  the  rate  of  48  cents  for  placing  a  policy  bearing  5  cents 
weekly  premium,  and  the  physician's  fee  of  50  cents.  But  the  issue 
of  each  policy  involves  besides  these  specific  charges  a  large  pro 
rata  for  general  expense,  the  exact  amount  of  which  is  not  supplied 
by  the  published  accounts.  The  initial  charge,  while  large  in 
itself  as  compared  with  the  year's  premiums,  becomes  particularly 
burdensome  to  persisting  policy-holders  by  reason  of  the  heavy 
lapse  rate. 

"From  the  most  careful  accounting  made  time  and  again,"^ 
says  the  John  Hancock,  *'the  weekly  premium  policies  do  not 
square  themselves  and  make  good  the  initial  and  current  expenses 
and  loss  and  provide  for  the  State  requirement  of  reserve,  until  at 
least  three  full  years'  premiums  have  been  paid.  .  .  .  Not  a  poKcy 
that  lapses  before  at  least  three  full  years'  premiums  have  been 
paid  but  leaves  a  greater  or  less  deficiency  for  the  survivors  ta 
bear."  .  .  . 

"  On  the  average  fully  one-half  the  entrants  lapse  their  pohcies 
before  the  end  of  the  first  year  and  a  majority  of  these  within  the 
first  quarter,  though  no  policy  lapses  until  four  weekly  premiums 
are  overdue." 

The  experience  of  the  John  Hancock  is,  of  course,  not  exceptional. 
The  Metropolitan  lapse  rate  appears  to  be  larger,  and  that  of  the 
Prudential  still  larger.  The  Armstrong  Committee  found  that  in 
the  MetropoHtan, — 

"  More  than  one-third  of  the  policies  issued  do  not  survive  three 
months,  and  about  one-half  are  cancelled  within  a  year.  In  190S- 
the  company  took  one  week's  industrial  issue  from  each  month 
in  the  year,  and  followed  the  issue  through  a  period  of  twelve 
months,  with  the  following  result: — 


14 

Per  Cent. 

Rate  of  lapses  in  first     3  month  from  date  ^of  issue     ....      35.40 

"      "  "  6        "      "  "  "       .    .    .    .      43.57 

"       "  "  9         "       "  "  "        .    .    .    .      48.28 

"      "  "         12        "       "  "  "       ....      51.46 

In  1904  the  average  time  for  which  premiums  were  paid  on  policies 
which  lapsed  within  one  year  from  issue  was  6.05  weeks. 

The  net  result  to  the  Metropolitan  Company  from  each  policy 
so  lapsed  is  as  follows : — 

Initial  cost  of  policy $2.07 

Cost  of  carrying  policy .52 


$2.59 
Averageweeklypremiumsat  12.004  cents  for  6.05  weeks     .    .        .726 


Net  loss  to  the  company  (i.e.,  to  the  persisting  policy-holders)    $1 .864 
Net  loss  to  the  insured  (12.004  cents  per  week  for  6.05  weeks)        .726 

During  the  second  year  (in  which  about  10  %  of  the  poKcies  lapse) 
and  the  third  year  (in  which  about  5  %  lapse)  the  net  loss  to  the 
company  (that  is,  to  the  persisting  pohcy-holders)  grows  gradually 
less,  but  that  to  the  insured  whose  poUcies  lapse  grows  very  much 
greater.  For,  while  the  average  net  loss  to  the  insured  whose  poHcies 
lapse  during  the  first  year  is  only  73  cents,  the  average,  figured 
on  the  same  basis,  for  those  whose  policies  lapse  in  the  second  year 
is  approximately  $8.88,  and  the  average  net  loss  to  those  whose 
poUcies  lapse  in  the  third  year  is  approximately  $15.12.  In  1904 
the  Metropolitan  wrote  1,829,559  new  policies.  Applying  the  above 
percentages  to  the  business  of  the  Metropolitan  for  the  full  years 
of  1904  and  1905,  we  find  that  941,491  of  the  1,829,559  policies 
written  in  1904  must  have  lapsed  within  the  year  1905,  and  that 
the  net  loss  on  these  lapsed  policies  aggregated  $2,438,461.68,  of 
which  the  insured  bore  $683,522.46,  and  the  persisting  policy- 
holders $1,754,939.22. 


15 


(B)  THE  COLLECTION  CHARGE. 

But  besides  the  deficit  due  to  lapses  the  persisting  poUcy-holder 
l)ears  another  fearful  burden.  Even  in  the  honestly  managed 
John  Hancock  the  fee  of  the  collector  is  20%  of  each  week's 
premium,  and  this  20  %  charge  is  only  a  part  of  the  cost  of  collec- 
tion. There  is  in  addition  necessarily  the  large  expense  of  an 
elaborate  system  of  superintendence  and  accounting.  Bear  in 
mind  that  20  %  of  an  industrial  premium  is  equal  to  40  %  of  the 
sum  payable  as  premium  for  a  Uke  amount  of  ordinary  insurance. 

Obviously,  therefore,  a  substantial  reduction  of  the  present  cost 
of  industrial  insurance  is  not  possible  unless  some  radical  change  of 
system  be  introduced  whereby  the  initial  expenses,  the  cost  of  pre- 
mium collection,  and  the  percentage  of  lapses  is  greatly  lessened. 


THE  SACRIFICE  OF  THE  THRIFTY. 

The  supporters  of  the  present  system  of  industrial  insurance 
declare  that  such  a  reduction  of  expenses  and  of  lapses  is  impos- 
sible. They  insist  that  the  total  loss  to  the  insured  and  the  heavy 
burden  to  the  policy-holders  from  lapses,  as  well  as  from  the  huge 
<;ost  of  premium  collection,  must  all  be  patiently  borne  as  being 
the  unavoidable  incidents  of  the  beneficent  institution  of  life  in- 
surance when  applied  to  the  workingman.  They  declare  that  the 
appalling  waste  incident  to  the  forfeiture  within  three  years  of 
two-thirds  of  all  policies  written  is  a  sacrifice  essential  to  the  ulti- 
mate salvation  of  the  small  persisting  minority,  and  that  the  huge 
-expense  involved  in  the  house-to-house  collection  of  weekly 
premiums  is  necessary  to  prevent  still  more  lapses  on  account  of 
the  workingman's  alleged  lack  of  thrift. 

It  may  be  questioned  whether,  in  view  of  the  heavy 
expense  now  attending  industrial  insurance,  the  dis- 
continuance   of    premium    payments    which    yield    such 


16 


SLIGHT  PROBABILITY  OF  NET  RETURNS  IS  NOT  EVIDENCE 
RATHER  OF  THRIFT  THAN  OF  THRIFTLESSNESS.  It  is  SUrely  dif- 
ficult to  justify  a  system  of  insurance  as  to  which  it  may  be  fore- 
told that,  of  the  millions  who  are  entered  each  year  at  a  per  capita 
initial  expense  of  $2.07,  a  majority  will  not  only  let  their  pohcies 
lapse  within  the  year,  but  will  on  the  average  pay  in  premiums 
only  72  cents.  Does  not  such  a  record  of  mortality  in  policies 
prove  conclusively  that  most  of  the  entrants  had  been  over- 
persuaded   or  misled  into  taking  the   insurance?     But  if,   as 

THE  COMPANIES  CONTEND,  THE  DISCONTINUANCE  OF  PREMIUM 
PAYMENTS  IS  EVIDENCE  OF  THRIFTLESSNESS,  SURELY  THE 
THRIFTY  WHO  PERSEVERE  SHOULD  NOT  BE  COMPELLED  TO 
SUBMIT  TO  A  SYSTEM  WHICH  REQUIRES  SUCH  GREAT  AND 
LARGELY  USELESS  SACRIFICES  IN  THE  SUPPOSED  INTEREST 
OF  A  SMALL  MINORITY. 

The  thrifty  workingman,  like  people  of  larger  means,  should 
have  the  opportunity  of  obtaining  life  insurance  at  more  nearly 
its  necessary  cost. 


THE  REMEDY. 

The  sacrifice  incident  to  the  present  industrial  in^ 
surance  system  can  be  avoided  only  by  providing  an 
institution  for  insurance  which  will  recognize  that  its 
function  is  not  to  induce  working  people  to  take 
insurance  regardless  of  whether  they  really  want  it 
or  can  afford  to  carry  it,  but  rather  to  supply  in- 
surance upon  proper  terms  to  those  who  do  want  it 
and  can  carry  it, — ^an  institution  which  will  recognize 
that  the  best  method  of  increasing  the  demand  for 
life  insurance  is  not  eloquent,  persistent  persuasion, 
but,  as  in  the  case  of  other  necessaries  of  life,  is 
to  furnish  a  good  article  at  a  low  price. 


17 


THE  SAVINGS  BANK  THE  BEST  MEDnJM. 

Massachusetts  in  its  189  savings  banks,  and  the  other  States 
with  savings  banks  similarly  conducted,  have  institutions  which, 
with  a  slight  enlargement  of  their  powers,  can  at  a  minimum  of 
expense  fill  the  great  need  of  life  insurance  for  workingmen. 

The  only  proper  elements  of  the  industrial  insurance  business 
not  common  to  the  savings  bank  business  are  simple,  and  can  be 
supplied  at  a  minimum  of  expense  in  connection  with  our  existing 
savings  banks.     They  are: — 

(a)  Fixing  the  terms  on  which  insurance  shall  be  given. 

(b)  The  initial  medical  examination. 

(c)  Verifying  the  proof  of  death. 

The  last  involves  an  inquiry  similar  in  character  to  that  now 
performed  by  the  clerks  of  savings  banks  in  the  identification  of 
depositors. 

The  second  is  the  work  of  a  physician,  who  is  available  at  no 
greater  expense  to  the  savings  bank  than  to  the  insurance  com- 
pany. 

The  first  is  the  work  of  an  insurance  actuary,  who  would  be 
-equally  available  to  the  savings  banks  as  he  is  to  insurance  com- 
panies, if  the  former  undertook  the  insurance  business.  And  the 
present  cost  of  actuarial  service  can  be  greatly  reduced:  first,  by 
limiting  the  forms  of  insurance  to  two  or  three  standard  forms  of 
simple  policies,  uniform  throughout  the  State;  and,  secondly, 
by  providing  for  the  appointment  of  a  State  actuary,  who,  in  com- 
nection  with  the  insurance  commissioner,  shall  serve  all  the  savings- 
insurance  banks.  The  work  of  such  an  actuary  is,  indeed,  now 
necessarily  performed  in  large  part  in  each  State  by  the  insurance 
xiepartment,  as  an  incident  of  supervising  life  insurance  com- 
panies. 

The  savings  banks  could  thus  enter  upon  the  insurance  business 
under  circumstances  singularly  conducive  to  extending  to  the 
workingman  the  blessing  of  safe  life  insurance  at  a  low  cost,  be- 
<jause : — 


18 

First.  The  insurance  department  of  savings  banks  would  be 
mangaged  by  experienced  trustees  and  officers  who  had  been 
trained  to  recognize  that  the  business  of  investing  the  savings  of 
persons  of  small  means  is  a  quasi-pubUc  trust  which  should  be 
conducted  as  a  beneficent  and  not  as  a  selfish  money-making  in- 
stitution. 

Second.  The  insurance  department  of  savings  banks  would  be 
managed  by  trustees  and  officers  who  in  their  administration  of 
the  savings  of  persons  of  small  means  had  already  been  trained 
to  the  practice  of  the  strictest  economy. 

Third.  The  insurance  business  of  the  savings  banks,  although 
kept  entirely  distinct  as  a  matter  of  investment  and  accounting, 
would  be  conducted  with  the  same  plant  and  the  same  officials, 
without  any  large  increase  of  clerical  force  or  incidental  expense, 
except  such  as  would  be  required  if  the  bank's  deposits  were  in- 
creased. Until  the  insurance  business  attained  considerable 
dimensions,  probably  the  addition  of  even  a  single  clerk  might  not 
be  necessary.  The  business  of  life  insurance  could  thus  be  estab- 
Kshed  as  an  adjunct  of  a  savings  bank  without  incurring  that 
heavy  expense  which  has  ordinarily  proved  such  a  burden  in  the 
estabhshment  of  a  new  insurance  company. 

If  the  individual  risks  were  hmited  at  first  to,  say,  $150  on  a 
single  hfe,  the  business  could  be  begun  safely  on  a  purely  mutual 
basis  as  soon  as  a  few  hundred  lives  were  insured,  or  earher  if  a 
guaranty  fund  were  provided.  As  the  business  increased,  the  limit 
of  single  risks  could  be  correspondingly  increased,  but  should 
probably  not  exceed  $500. 

Fourth.  The  insurance  department  of  savings  banks  would 
open  with  an  extensive  and  potent  good  will,  and  with  the  most 
favorable  conditions  for  teaching,  at  slight  expense,  the  value  of 
hfe  insurance.  The  safety  of  the  institution  would  be  unques- 
tioned. For  instance,  in  Massachusetts  the  holders  of  the  1,829,- 
487  savings  bank  accounts,  a  number  equal  to  three-fifths  of  the 
whole  population  of  the  State,  would  at  once  become  potential 
policy-holders;  and  a  small  amount  of  advertising  would  soon 
suffice  to  secure  a  reasonably  large  business  without  solicitors. 


19 

Fifth.  With  an  insurance  clientele  composed  largely  of  thrifty- 
savings  bank  depositors,  house-to-house  collection  of  premiums 
could  be  dispensed  with.  The  more  economical  monthly  pay- 
ments of  premiums  could  also  probably  be  substituted  for  weekly 
payments. 

Sixth.  A  small  initiation  fee  could  be  charged,  as  in  assessment 
and  fraternal  associations,  to  cover  necessary  initial  expenses  of 
medical  examination  and  issue  of  policy.  This  would  serve  both 
as  a  deterrent  to  the  insured  against  allowing  policies  to  lapse  and  a 
protection  to  persisting  policy-holders  from  unjust  burdens  which 
the  lapse  of  policies  casts  upon  them. 

Seventh.  The  safety  of  savings  banks  would,  of  course,  be  in  no 
way  imperilled  by  extending  their  functions  to  life  insurance.  Life 
insurance  rests  upon  substantial  certainty,  differing  in  this  respect 
radically  from  fire,  accident,  and  other  kinds  of  insurance.  As 
Insurance  Commissioner  Host,  of  Wisconsin,  said  in  a  recent 
address : — 

"If  we  take  a  number  of  thousand  persons  of  different  ages,  nothing  is  more 
certain  in  nature  than  that  their  natural  deaths  will  occur  in  a  series  not 
differing  very  widely  from  that  of  other  thousands  of  persons  under  similar 
circumstances. 

The  practical  experience  of  this  theory  has  given  to  the  world  the  mortality 
tables  upon  which  life  insurance  premiums  are  ascertained  and  the  reserves 
for  the  future  needs  calculated. 

No  life  insurance  company  has  ever  failed  which  complied  strictly  with  the 
law  governing  the  calculation,  maintenance,  and  investment  of  the  legal 
reserve.  .  .  ." 

The  causes  of  failure  in  life  insurance  companies  since  Elizur 
Wright  established  the  science  have  been  excessive  expense,  un- 
sound investment,  or  rapacious  or  dishonest  management.  To 
the  risk  of  these  abuses  all  financial  institutions  are  necessarily 
subject,  but  they  are  evils  from  which  our  savings  banks  have  been 
remarkably  free.  This  practical  freedom  of  our  savings  banks 
from  these  evils  affords  a  strong  reason  for  utilizing  them  to  supply 
the  kindred  service  of  Hfe  insurance. 

The  theoretical  risk  of  a'  mortality  loss  in  a  single  institution 


20 

greater  than  that  provided  for  in  the  insurance  reserve  could  be 
absolutely  guarded  against,  however,  by  providing  a  general 
guaranty  fund,  to  which  all  savings-insurance  banks  within  a  State 
would  make  small  pro  rata  contributions, — a  provision  similar  to 
that  prevailing  in  other  countries,  where  all  banks  of  issue  contrib- 
ute to  a  common  fund  which  guarantees  all  outstanding  bank  notes. 

Eighth.  In  other  respects,  also,  co-operation  between  the 
several  savings-insurance  banks  within  a  State  would  doubtless, 
under  appropriate  legislation,  be  adopted;  for  instance,  by  pro- 
viding that  each  institution  could  act  as  an  agent  for  the  others  to 
receive  and  forward  premium  payments. 

Ninth.  The  law  authorizing  the  establishment  of  an  insur- 
ance department  in  connection  with  savings  banks  should,  obviously, 
be  permissive  merely.  No  savings  bank  should  be  required  to 
extend  its  functions  to  industrial  insurance  until  a  majority  of  its 
trustees  are  convinced  of  the  wisdom  of  so  doing. 

The  savings  banks  are  not,  however,  the  only  existing  class  of 
financial  institutions  which  could  be  utilized  for  the  purpose  of  sup- 
plying, at  a  low  expense  rate,  insurance  in  small  amounts  under 
a  system  requiring  frequent  premium  payments.  Co-operative 
banks,  as  operated  in  Massachusetts  and  in  some  other  States, 
would,  under  appropriate  regulation,  be  admirably  adapted  to 
supply  a  part  of  the  required  service.  The  excellent  record  of 
these  institutions  in  Massachusetts  presents  a  most  encouraging 
exhibit  of  the  achievements  of  financial  democracy  when  apphed 
to  small  units  and  when  operating  under  a  wise  system  of  super- 
vision. 

Public  attention  having  at  last  been  directed  to  this  subject, 
our  workingmen  will  not  long  submit  to  the  needless  sacrifice  of 
their  hard-earned  savings,  described  in  the  following  judgment 
of  the  "Armstrong  Committee"  on  the  methods  of  the  Metropoli- 
tan Company: — 

"In  fine  the  industrial  department  furnishes  in- 
surance   AT    TWICE    THE    NORMAL    COST    TO    THOSE    LEAST    ABLE 

TO  PAY  FOR  it;   a  large  proportion,  if  not  the  greater  number  of 
the  insured,  permitting  their  policies  to  lapse,  receive  no  money 


21       • 

return  for  their  payments.  Success  is  made  possible  by  thorough 
organization  on  a  large  scale  and  by  the  employment  of  an  anny 
of  underpaid  solicitors  and  clerks;  and  from  margins  small  in 
individual  cases,  but  large  in  the  aggregate,  enormous  profits 
have  been  realized  upon  insignificant  investment." 

If  an  opportunity  for  cheaper  life  insurance  is  afforded  by  means 
of  an  extension  of  the  functions  of  our  savings  banks,  the  present 
industrial  insurance  companies  may  be  permitted  to  pursue  their 
efforts  at  inculcating  thrift  in  accordance  with  the  system  which 
seems  to  them  wise,  and  their  claim  that  the  present  huge  waste 
is  inevitable  will  be  duly  tested. 

But  if  we  fail  to  offer  to  workingmen  some  oppor- 
tunity FOR  CHEAPER  INSURANCE  THROUGH  PRIVATE  OR 
QUASI-PRIVATE  INSTITUTIONS,  THE  EVER-READY  REMEDY  OF 
STATE  INSURANCE  IS  CERTAIN  TO  BE  RESORTED  TO  SOON;  AND 
THERE  IS  NO  OTHER  SPHERE  OF  BUSINESS  NOW  DEEMED 
PRIVATE  UPON  WHICH  THE  STATE  COULD  SO  EASILY  AND  SO 
JUSTIFIABLY  ENTER  AS  THAT  OF  LIFE  INSURANCE. 

However  great  the  waste  in  present  life  insurance  methods,  our 
workingmen  will  not  be  induced  to  abandon  life  insurance.  To 
them,  as  to  others,  life  insurance  has  become  a  prime  need.  It 
must  be  continued.  It  should  be  encouraged.  In  spite  of  the 
disastrous  results  of  this  form  of  savings  investment,  the  industrial 
insurance  business  has  assumed  enormous  proportions.  On 
December  31,  1904,  the  number  of  industrial  life  policies  outstand- 
ing in  the  three  great  companies  (MetropoHtan,  Prudential,  and 
John  Hancock)  was  14,731,463,  as  against  a  total  of  only  about 
5,258,255  ordinary  life  poHcies  outstanding  in  the  ninety  legal 
reserve  companies.  The  New  York  Life,  with  its  record  of 
957,201  policies  outstanding,  had  only  one-eighth  as  many  pohcy- 
holders  as  the  Metropolitan,  one-sixth  as  many  as  the  Prudential, 
and  three-fifths  as  many  as  the  John  Hancock.  In  the  year  1904 
alone  theMetropolitan,  Prudential,  and  John  Hancockwrote  3,742,- 
209  industrial  pohcies;  that  is,  more  than  three  times  as  many  as  the 
90  leading  level  premium  companies  wrote  of  ordinary  life  policies 
during   that  year.     In   Massachusetts   the   predominance   of  in- 


22 

dustrial  policies  is  even  greater  than  the  average.  With  a  popula- 
tion of  3,000,680  there  were  outstanding  December  31,  1904, 
1,080,003  industrial  policies;  that  is,  one  for  every  three  inhabi- 
tants, counting  men,  women,  and  children,  and  of  ordinary  life 
policies  only  257,792  were  outstanding. 

The  demand  of  workingmen  for  life  insurance  will  continue  and 
will  grow;  but  the  yearly  tribute  of  the  workingmen 
TO  prudential  stockholders  of  dividends  equivalent 
TO  219.78%  on  the  capital  actually  paid  into  the  com- 
pany, the  yearly  waste  of  millions  in  lapsed  policies, 
in  fruitless  solicitation,  and  in  needless  collections, 
WILL  CEASE.  The  question  is  merely  whether  the  remedy  shall 
be  applied  through  properly  regulated  private  institutions  or 
whether  the  State  must  itself  enter  upon  the  business  of  life  insur- 
ance. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  50  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


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Gaylord  Bros. 

Makers 
Syracuse,  N.  ^ 

PAT.  m.  21.  1908 


LD9-^o- 


D-b^m'o 


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